My Daughter’s Having a Baby. How Much Will College Cost in 18 Years?

Get ready for some sticker shock.

Q. My daughter is having a baby and I want to save for college. How much would I need to save each month to have enough so the grandbaby won’t need loans? And is a 529 plan the best place to save?
— Grandma-to-be

A. Congratulations on your family’s new addition – and get ready for some sticker shock.

You’ll need to save a whole lot of cash if you want to fully fund this child’s education.

We asked Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield, N.J. to run the numbers.

He assumed you’re starting with a zero balance. Then he assumed conservative 4% growth rate on invested funds and a 5% inflation rate on annual cost of education.

Using Rutgers University as a state school example, the total cost of a four-year undergrad degree including room and board will be $463,812 when your grandchild attends college, DeFelice said.

“To be able to pay for that in full you will need to save $1,231 per month or $14,775 per year through the year 2037 given the above assumptions,” DeFelice said.

Using Princeton University as a private school example, DeFelice said, the total cost of a four-year undergrad degree including room and board will be $611,641 when your grandchild attends college.

To be able to pay for that in full, he said, you will need to save $1,624 per month or $19,484 per year through the year 2037.

These are sobering numbers indeed.

DeFelice said it’s entirely possible that the assumptions he used are way off base.

He said 5% is the historical educational expense inflation rate over the past 15 years, and we don’t know if college costs will continue rise at that torrid pace.

“My personal feeling is that something needs to be done about the skyrocketing cost of education in this country, but that is an argument for another day,” he said.

He also said a 4% investment return is conservative compared to historical stock market average annual gains. But given how far the market has come since the 2007-2009 financial crisis, DeFelice said he thinks it’s prudent to conservatively plan for lower than normal returns in the future rather than hope the good times will always continue.

You should also consider that your grandchild may qualify for some form of financial aid, receive scholarships, and/or attend a less expensive school than the ones we used as examples.

“Don’t forget about the child’s parents either – they can and should be expected to contribute as well,” DeFelice said. “We are seeing multi-generational college education funding strategies come into play more and more today than ever before, where both parents and grandparents come up with a strategy to do what they can afford to do given life’s other demands.”

Of course, not everyone is able to put aside this much money, and you shouldn’t shortchange your retirement to do so, DeFelice said. While fully paying for college for your grandchild is a noble goal, remember, you can always borrow money for college but you can’t borrow money for retirement.

As far as savings vehicles, a 529 plan is still the most tax-efficient account to pay for college on the market today, DeFelice said.

It’s important to note that if the grandparent is listed as the owner of the 529 plan, it can actually hurt the student’s chances to qualify for financial aid, DeFelice said.

“While grandparent-owned 529 plans do not get counted in the parents’ asset calculation formula, money coming out of the plan to pay for college is considered a gift to the student,” he said. “This will be viewed as untaxed income for your child for financial aid purposes, and can impact the student’s aid eligibility by up to 50% of the distribution in the following year.”

For that reason, DeFelice said he usually recommends the 529 plan be opened up with the parents as owners, and the grandparents can gift money directly to the plan itself, or to the parents who would then in turn deposit the funds.

You can find more strategies for paying for college without building a mountain of debt here

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What’s the Best Way for Grandma to Gift My Kids Money for College?

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Q. My mother wants to gift my two kids $50,000 each for college. I know there can be tax and financial aid consequences. Any advice on the best way to do this?
— Lucky

A. Your mother has several options.

The best way really depends on what is most important to your mom, said Mary Scrupski, the director of estate planning with Prestige Wealth Management Group in Flemington and Millburn, New Jersey.

Scrupski said if your mom just wants to help your children with their education, she could set up a 529 plan for each child and contribute $50,000 to each account.

529 plans are tax-deferred accounts that are earmarked for education, Scrupski said. Earnings are not subject to federal income tax and generally are not subject to state income tax when used for the qualified educational expenses of the designated beneficiary such as tuition, fees, and books, as well as room and board, she said.

“If your children are young, the account could grow free of income tax for many years before it is needed,” she said. “This is a very tax-efficient way to pay for education.”

But there are gift tax concerns in setting up the plan, Scrupski said.

In general, your mother can give each child $14,000 a year without using up any of her lifetime gift/estate tax exemption, she said, but there is a special rule for contributing to a 529 plan.

“If she contributes the $50,000 in the first year, it will be pro-rated over the following five years at $14,000 a year,” Scrupski said. “This limit has much less impact, however, than it used to because the federal estate and gift tax exemption amount is now $5.45 million.”

Scrupski said that payment of tuition directly to the educational institution is not a taxable gift at all, no matter how large the payment, so this is another option.

But the direct payment of tuition would most likely jeopardize any financial aid the child would be eligible for based on need, she said.

“If financial aid is a concern, then a 529 plan account might work so long as your mother is the custodian, and not a parent,” she said. “If the parent is the custodian, the plan will most likely be considered an asset of the parent and will have to be reported on the child’s financial aid application.”

Once payments were made, however, out of the account, then this would be considered income to the child and would impact his or her financial aid, Scrupski said.

“Planning for financial aid can be challenging because each school has its own rules,” Scrupski said. “Your mother might want to wait until the child is out of school completely and then possibly gift the child the funds to pay his or her student loans or make gifts for other purpose such as a down payment on a house or a wedding, instead of paying for school if the child is likely to receive financial aid.”

Your mom may want to work with her accountant or tax attorney before gifting anything, said Vicky Tomaro, an investment adviser representative with Tomaro Financial Group in Wall, New Jersey.

If your mom gives more than the annual gift exclusion amount — if it’s not part of the special 529 five-year giving rule — it could affect your mom’s estate long-term, Tomaro said.

More Money-Saving Reads:

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My Kid Doesn’t Want the Money I Saved for His College. What Now?

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Q. I have two kids and one of them is refusing my help for college bills. I have probably half of what he needs in a 529 plan. His sibling also has a plan. Should I change this sibling to be the beneficiary or should I wait in case he changes his mind?
— Mom

A. College is a very expensive proposition, and we’re wondering how your son plans to pay for it all.

Depending on the answer to that question and the expected cost of college for each of your children, you may want to wait before you make a move.

Changing beneficiaries on a 529 plan is not a hard thing to do, but you can take some time to decide if it’s the right thing to do, said Bill Connington of Connington Wealth Management in Paramus, New Jersey.

He said most plans will allow you to change beneficiaries with a form, and depending on the plan, you may have to pay an administration fee.

As a rule, Connington said, changing the beneficiary of an account can result in a gift or worse. But with a 529 plan, the account owner can change the beneficiary without tax consequences if the new beneficiary is a member of the family of the old beneficiary.

A member of the family is defined in IRS Code Section 529, but includes, among others, siblings, decedents, parents and cousins.

So for you, it seems there wouldn’t be tax consequences if you make the beneficiary change among siblings.

“If the new beneficiary is not a member of the family, the change will be treated as a non-qualified distribution and the earnings portion of the account will be subject to income tax and a 10% penalty,” he said.

But back to your son’s decision.

You should try to sit down and run some numbers with him. See what kinds of scholarships or grants he can expect, but then take a close look at the costs of borrowing. Look at how student loans will accumulate over time, what the monthly payment is likely to be upon graduation and how this will impact your son’s budget after college.

He may change his mind when you run the numbers together.

[Editor’s note: Keep in mind there are limits on how much a student can borrow in federal education loans, and getting private student loans often requires having good credit or a co-signer with good credit. Taking on student loan debt can also have a significant impact on your future credit health, so it’s smart to keep an eye on your credit before you borrow and as you’re paying off education debt. As part of your regular credit checkup, you can see two of your credit scores for free each month on Credit.com.]

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Can We Pay Off Debt to Qualify for More Financial Aid?

happy_graduates

Q. My daughter goes to college in one year. We’ve saved a lot in 529 plans and retirement accounts, and we only have about $45,000 in a brokerage account that would count against us for financial aid purposes. I also have $20,000 in credit card debt. Should I sell the stocks and pay off debt so we appear to have less cash for financial aid purposes? The brokerage money has no real goal.

A. Paying off debt can be a great thing, but let’s first talk about financial aid and how your assets will be considered.

The first step in the financial aid process is completing a form called the Free Application for Federal Student Aid, better known as FAFSA, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette, NJ. Roughly 300 schools also require another form known as the CSS Profile, which is short for the College Scholarship Service Profile.

We’ll focus on the more common FAFSA form and how it treats various assets for financial aid purposes.

“On a macro level, the FAFSA formula treats income/assets as follows: 20% of student’s assets (excluding 529s), 50% of student’s income after some allowances, 2.6% to 5.6% of parental assets based on sliding income and allowances, and 22% to 47% of a parent’s income based on sliding income and allowances,” Maye said.

These percentages are all important for the starting point for need-based financial aid — the calculation of the Expected Family Contribution (EFC) — which considers income as well as assets of both the parent and student, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge, N.J.

“Neither mortgage debt nor consumer debt such as auto loans and credit card balances can be used to offset the value of investment assets in calculating the net worth, which is entered into the formula,” Mott said.

Now with your situation, Maye said, the 529 plans as a parental asset may reduce financial aid by a maximum of 5.64%, depending on your circumstances.


“In terms of the retirement accounts, it is good news as the calculation excludes retirement assets such as 401(k)s, IRAs and Roth IRAs,” Maye said. “However, if you tap a retirement asset to pay college bills — including a Roth IRA — that is considered income on the following year’s FAFSA.”

Maye said your brokerage account receives the same treatment as a 529.

Using your assets to pay debt can reap multiple rewards, Mott said.

“It may reduce the EFC, your cash flow should improve without the monthly payments and you will save the interest expense as well,” she said.

Assuming you have an adequate emergency fund, it likely makes sense for you to use the taxable brokerage account to pay off credit cards, Maye said.

“The primary reason it makes sense to the pay off the credit card debt is it eliminates a non-tax-deductible, high interest rate liability,” Maye said. “The fact that it might be helpful from a financial aid perspective is a secondary benefit.”

But, before you use your brokerage account to reduce the outstanding balance on your credit cards, be sure you understand the tax consequences of the decision, Mott said.

“The addition of possible capital gains to your adjusted gross income that aren’t fully offset by taxes might actually increase your calculated EFC,” she said. “You also don’t want to end up with a tax bill you hadn’t anticipated come next April.”

She recommends you speak with a tax professional to determine what, if any, capital gains might result from the sale and how that would affect your 2015 income tax profile.

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